Are 529 Plans a Good Idea?
When you start planning out the finances of your child’s education, you’ll see a lot of publications recommending 529 plans. These are state-run investment vehicles that offer certain (varied) tax breaks. They’re often compared to a 401(k) for college.They aren’t – not exactly. In fact, they might not be a good idea at all.
I’ll explain why in a moment… but first, what exactly is a 529?
What Makes Up A 529 Plan?
The first thing to realize is this: Every state has its own 529 plan, and some have several. You can invest in any 529 plan anywhere – but the rules and benefits will be often be different for out-of-staters.
The basic components – and variables – are these:
- Taxes. The biggest reason most people give for investing in a 529 is the tax breaks. But don’t just jump in – some 529s allow contributions to be tax-deductible, while others don’t (and still others are somewhere in between). Any withdrawals (including gains… IF there are any!) made from 529 plans to be used for college expenses are tax-free. However, if you use the money for anything other then qualified educational expenses, taxes and penalties could apply.
- Maintenance Fees. 529 plans are almost exclusively funds – mutual funds, index-linked funds, and other investment vehicles of that ilk. And, as with any investment in a directed fund, there will be fees associated with it. Some fees are tiny – while others are high enough, they make it very difficult to ever get your compounding interest benefits going. Especially since most 529s are only held 18 years or less, and can’t be aggressive during your child’s teen years (the money is needed too quickly).
- Other Fees. 529s have their own rules and regs. Some will charge you maintenance fees themselves, on top of the fees of the funds. Most have investment minimums – and some have monthly contribution requirements.
As you can see, there’s a lot of expense associated with 529 plans – and sometimes little benefit. I’ll weigh the pros and cons of 529 plans later in the week – for now, I suggest you read our free report on 529s, The 529 Crisis.
And, while you’re researching 529s, here’s a great site that will let you compare 529 plans state-by-state.
But, don’t start anything up just yet. Hang on for Part 2… where we’ll determine if 529 plans are the best investment vehicle for college, or if not, what is.
Related Articles:
Are 529 Plans a Good Idea? Part 2
Do 529 Plans Hurt Financial Aid?
What Are the Best 529 Plans? Part 2
Until next time,
Scott Weingold
